Mint FS – Mortgages Guide
What is a Mortgage? at its simplest, a mortgage is a loan, paid off over a long period, to help you buy a property.
This loan is secured against the property you’re buying – so if you fail to repay your loan to the bank or building society from which you borrowed, they could repossess the property to recoup their loan.
Mortgages typically last for around 25 years, but you can borrow over shorter or longer terms.
Mortgages Guide by Mint FS
How does a mortgage work?
When you take out a mortgage, you’ll have to repay two parts – the ‘capital’ (the actual loan to buy the property) and the ‘interest’ (what your lender charges to lend you money).
But there are different mortgage options available to you.
Repayment mortgage – with these mortgages, your monthly repayments pay off interest and capital at the same time, until your loan is repaid in full at the end of the term.
Interest-only mortgage – with these mortgages, your monthly repayments only pay the interest, none of the capital. When you come to the end of your mortgage term, you’ll have to pay all of the capital back, so will need a plan to meet this large repayment.
What are the different types of mortgage deal?
Mortgages Guide: Once you’ve decided what kind of mortgage you want, there’s more for you to decide. Mortgage deals come in a variety of forms, and the deal you end up choosing will depend on your circumstances and needs both at the time of applying and in the future.
The different types of mortgage deal include:
- Fixed-rate mortgages
- Tracker mortgages
- Discount mortgages
- Standard variable rate mortgage
What is a fixed-rate mortgage?
A fixed-rate mortgage can provide financial stability. Your interest rate stays the same for a set period of time and, therefore, your monthly mortgage repayments remain the same.
This is in contrast to a variable-rate mortgage, which will go up or down in relation to the Bank of England base rate, or your lenders’ standard variable rate (SVR).
The term of a fixed-rate mortgage usually lasts between two to five years, but can be much longer. When this period comes to an end, your lender will typically transfer you automatically onto its SVR so it’s important to review your situation before this happens.
Fixed-rate mortgage benefits
Fixed-rate mortgages give you peace of mind. You know your monthly mortgage repayments won’t rise for the length of your deal, even if your lender’s SVR or the Bank of England base rate does.
This can help you to plan ahead and budget more easily for other household and day-to-day expenses, without facing any nasty repayment surprises.
A fixed-rate mortgage may be the right choice if you’re on a tight budget and need the certainty and stability of a fixed monthly payment.
Use this handy mortgage repayment calculator to see what your monthly payments could be.
Fixed rate mortgage drawbacks
In the current low-rate environment, fixed mortgages are a little more expensive than variable rate deals.
Furthermore, if rates were to drop, customers on a fixed-rate deal would not see any of the benefits.
What is a tracker mortgage?
A tracker mortgage is a type of variable-rate mortgage. The interest rate tracks the Bank of England base rate at a set margin (for example, 1%) above or below it.
Tracker mortgage deals can last for as little as one year, or for the total life of the loan.
Once your tracker deal comes to an end, you’re likely to be automatically transferred on your lender’s standard variable rate (SVR). Typically, this will have a higher rate of interest, so make sure you review your mortgage in time.
What are tracker mortgage benefits and drawbacks?
Tracker mortgage benefits
In certain economic circumstances, borrowers can secure tracker mortgage deals with very low rates of interest. For example, with the current, historically low base rate of 0.75%, a +1% tracker mortgage would charge a rate of just 1.75% interest.
While your tracker mortgage rate is low, you can take the opportunity to overpay on your mortgage, shortening the total length of time it takes you to pay off your mortgage and cutting the amount of interest you pay.
In addition, your rate is not dependent on the whim of your lender, it is not affected by changes in your lender’s SVR – just changes in the base rate.
Tracker mortgage drawbacks
On the other hand, as a variable deal, a tracker mortgage will not provide total rate security. If the base rate suddenly rises, so will the interest rate you pay.
This means that a tracker mortgage may not be suitable for someone on a tight budget, who needs to know exactly how much their monthly mortgage repayments will be. In these circumstances, it may make sense to choose a fixed-rate mortgage instead.
If you want to leave a tracker mortgage deal before the end of the set term, you’re likely to be charged an early repayment fee.
What is a discount mortgage?
A discount mortgage is a type of variable-rate mortgage. The term ‘discount’ is used because the interest rate is set at a certain ‘discount’ below the lender’s standard variable rate (SVR) for a set period of time.
For example, if a lender has an SVR of 5% and the discount is 1%, the rate you’ll pay will be 4%. And if the SVR is raised to 6%, your discount rate will also rise – in this case to 5%.
Discount mortgage deals typically last between two and five years. When your discount mortgage deal comes to an end, your lender will typically transfer you automatically onto its SVR.
What are discount mortgages benefits and drawbacks?
Discount mortgage benefits
Having a discount mortgage means you can be sure that your rate will always remain below your lender’s SVR, for the length of the deal.
In certain economic circumstances (for example, when SVRs are generally low as a result of a low base rate) this may mean your discount mortgage deal has a very low rate of interest.
Discount mortgage drawbacks
Because your discount rate tracks your lender’s SVR – and you have no control over what that SVR is – a discount mortgage does not offer much rate stability.
And borrowers with large discounts below their lenders’ SVR may be in a particularly vulnerable position when their discount mortgage deals come to an end. This is because they could face large and sudden rate hikes when they’re transferred onto their lenders’ SVRs.
So, if you’re on a tight budget and need your repayments to stay the same from month to month, it may make sense to choose a fixed-rate mortgage.
In addition, you may face early repayment charges if you pull out of a discount mortgage deal before the end of the term.
What is a standard variable rate mortgage?
A standard variable rate mortgage (also known as an SVR or reversion-rate mortgage) is a type of variable rate mortgage. The SVR is a lender’s ‘default’ rate – without any limited-term deals or discounts attached.
When a fixed, tracker or discount mortgage deal comes to an end, you will usually be transferred automatically onto your lender’s SVR.
A lender can raise or lower its SVR at any time – and as a borrower, you have no control over what happens to it.
Who sets standard variable mortgage rates?
Standard variable rates tend to be influenced by changes in the level of the Bank of England’s base rate. However, a lender may also decide to change its SVR while the base rate remains unchanged.
Lenders’ standard variable rates typically range from around 2% above the base rate (currently set at 0.75%) to 5% above it or even more.
What are standard variable mortgage beneifts and drawbacks?
Standard variable rate mortgage benefits
When the Bank of England base rate stood at a historic low of 0.25%, lenders significantly cut their SVRs to reflect this.
Now that it has risen to 0.75%, lenders have responded by increasing their SVRs. This is still low by historic standards.
So, if your previous mortgage deal has come to an end and you have been transferred onto a low SVR, you may be able to take advantage of that low rate by staying on it, and not looking for another deal. They often don’t have any early repayment charges, leaving you free to review and switch your mortgage whenever you like.
Standard variable rate mortgage drawbacks
Staying on your lender’s SVR is a very risky strategy – as it offers no rate security.
If you are on a tight budget and relying on your SVR to remain low, you’re in a very vulnerable position. In this case, it is very important you try to remortgage onto a fixed-rate deal (which offers rate stability) before it’s too late.
How big a deposit do I need for a mortgage?
There is no standard amount that people need to have saved up before they can get a mortgage. But a basic principle to keep in mind is that the bigger the deposit you have, the cheaper the mortgage deals you will be able to get.
This is because the more money you have to put towards a house, the less of a risk you pose to a lender. If you own more of the property, you’ll need a smaller loan and therefore have lower monthly repayments, making you less likely to fail to meet them.
And if your property were to fall in value, a higher deposit puts you at a far lower risk of negative equity, meaning your loan is bigger than the value of your property.
But don’t despair if you’re struggling to save a large deposit – there are still many mortgages out there for first-time buyers. You can find typical first-time buyer mortgage rates in our rates tables
What is loan-to-value and why does it matter?
The loan-to-value is the proportion of the property’s value that you are borrowing. Mortgages are priced by the loan-to-value – the higher this figure is, the more expensive the mortgage will be.
If you can put down a 15% deposit, instead of a 10% deposit, for example, you will be rewarded with a lower mortgage interest rate.
To get the most competitive mortgage deals on the market, you will usually need a deposit of 25% upwards and some of the best deals require 30% or even 40% deposits.
For most first time buyers, getting a deposit together this big may be unrealistic so you may want to look into alternative ways of funding your home purchase.
Can I get a mortgage with a small deposit?
The number of 90% and 95% mortgages on the market is on the increase so, provided you meet lenders’ affordability criteria, it’s entirely possible to get a mortgage if you have a 5% or 10% deposit.
Say you wanted to buy a £200,000 house. You’d need to have £20,000 in savings for a 90% mortgage or £10,000 in savings for a 95% mortgage.
There are also two government schemes aimed at helping people with small deposits to buy a house.
Shared Equity & Shared Ownership allow you to buy a share in a property using a small deposit and a mortgage while paying rent to a housing association for the remaining share.
Both of these schemes are designed for people with deposits of between 5% and 20%.
Whether you will be better off with an ordinary mortgage or using one of the government schemes will depend on your individual circumstances. An adviser will be able to talk you through your options and help you find the best deal.
Is it possible to get a mortgage without a deposit?
100% mortgages, where you don’t need any deposit, are virtually non-existent unless you have additional financial help from your family.
You can find out more about your options in our guide to how parents can help you onto the property ladder.
What are the ways to save for a mortgage deposit?
Help to Buy ISA
This allows you to save £200 a month (and £1,000 in your first year) and the government adds a 25% bonus. You can save a maximum of £12,000 into a Help to Buy Isa, which would be topped up to £15,000 with the government bonus.
The bonus is paid when you complete on your house purchase.
This is available to people aged between 18 and 40. The concept is similar to a Help to Buy Isa, but the money in a lifetime Isa can either be used to buy a property or to fund your retirement.
You can save in £4,000 a year, and the government will add a 25% bonus to a maximum of £1,000. But if you withdraw your money for any other reason than to buy a home (or at age 60 for retirement), you’ll face a 25% penalty.
Do I need to save more than just the mortgage deposit?
When you buy a property, it’s not just your deposit you’ll need to find. You’ll have to pay solicitor’s fees, as well as spend money on a survey.
Perhaps the biggest cost, however, will be stamp duty. This varies depending on the value of your property, but there is good news for first-time buyers.
If you’re buying a property worth £300,000 or less, you’ll have no stamp duty to pay. And if you’re buying a property worth up to £500,000, you’ll pay 5% on the difference between £300,000 and the property price.
Use this handy stamp duty calculator to work out how much you’ll pay.